EWI to expand down under with Melbourne property project named Yarra One
KUCHI NG: Eco World International Bhd ( EWI) is planning to expand its presence down under in the Australian property industry with its proposed maiden Melbourne project – Yarra One, a mixed development project with an estimated gross development value ( GDV) of RM72 8. 3 million.
The project will be developed into a 27- storey tower consisting of 268 residential units with a complementing retail and office podium and will take place on a 2,128 sqm parcel of land located in South Yarra, Melbourne which is owned by Salcon Development (Australia) Pty Ltd (Salcon Australia), Salcon Bhd’s (Salcon) wholly- owned property development arm.
In a press release by EWI, Datuk Teow Leong Seng, president and chief executive officer (CEO) of EWI explained the group’s rationale for selecting the parcel of land.
“Melbourne is a market which we are very familiar with and also a preferred investment destination for many Malaysian and regional customers. It was crowned the world’s most liveable city for the sixth year running according to the Economist’s Global Liveability Survey.
“This is a wel l- deserved reputation which the city takes great pride in and works hard to preserve, as attested by the excellent quality of life, plethora of amazing cuisine, world class educat iona l institutions, good employment opportunities and wide-ranging recreational amenities it offers its residents.
“We are therefore delighted to be offered the opportunity to work with Salcon to craft an outstanding residential-led development in South Yarra that will meet the lifestyle needs of discerning locals whilst offering a sound investment proposition for international buyers seeking to own an exclusive property just outside the fringe of Melbourne central business district (CBD),” he said in the statement.
To obtain the land for development, EWI has entered into a conditional share sales and purchase agreement (SPA) to acquire an 80 per cent stake in Salcon Australia through its wholly- owned subsidiary, Fortune Question for a total consideration of RM400,896.
Once the exercise is completed, EWI will then acquire the prime piece of land for a consideration of RM126.5 million, a figure matching the recent market value appraisal by a Australian local valuations firm, Knight Frank Valuations.
According to the research arm of Kenanga Investment Bank Bhd ( Kenanga Research), the land purchase consideration will put the land cost to GDV ratio at 17 per cent, which is moderately higher than the 13 per cent for EWI’s West Village Parramatta project in Sydney.
“Despite this, we believe Yarra One’s land cost to GDV ratio is reasonable considering it is prime land located only 5.3km from Melbourne’s CBD while the West Village Parramatta is located further away from the city at 24km west of Sydney’s CBD.
“Besides this, we also believe the group will be able to achieve low-mid teen pre-tax margins as wel l,” the research arm commented.
EWI’s management has guided that the proposed acquisition is in line with its ambitions to become a prominent global property player as it would the group to increase its development pipeline while breaking into a new target market by extending its geographic footprint and product range to cater to a wider customer base.
Overall, EWI’s ambitions has left the research arm positive but unsurprised as their built- in GDV replenishment assumptions of RM8.0 billion for the property developer had included consideration for aggressive landbanking in the next 12 to 18 months.
Shou ld t he pr op o s e d acquisit ion of the stake in Salcon Australia and the parcel of land come to fruition, Kenanga Research is forecasting EWI’s FY17E net gearing to increase to 0.11 fold from 0.05 fold while FY18E’s net gearing will rise to 0.18 fold from 0.08 fold once Yarra One’s development costs kick in.
“Nonetheless, its balance sheet is still relatively light and expected to go back into net cash in FY18 upon other project deliveries.”
That being said, Kenanga Research is raising its FY1718E sales assumption for the company by 4 to 1 per cent to RM3.14 to 3.15 billion in order to factor in Yarra One sales while cautiously toning down take-up rate assumptions for its projects in London.
Additionally, EWI’s forecasted FY17-18 earnings will be lowered marginally by 1 per cent to reflect the increased marketing costs for Yarra One while its contribution will likely only be felt between 2020 and 2021.
“This has no signi f icant impact on EWI’s associate, Ecoworld Development Group Bhd’s ( Ecoworld) earnings.”
As such, the research arm is maintaining its ‘ outperform’ rating on Ecoworld with an unchanged target price of RM1.72 per share.